What Is a SIMPLE IRA Plan for a Small Business?
Learn the essential requirements and administrative duties for offering a SIMPLE IRA, from choosing a plan structure to managing ongoing employer obligations.
A Savings Incentive Match Plan for Employees, or SIMPLE IRA, is a retirement savings plan for small businesses. It is a less complex and more cost-effective alternative to other employer-sponsored retirement plans. The plan allows both employees and employers to make contributions to individual retirement accounts for each participant. This benefit can help attract and retain employees while offering tax advantages.
Core Contribution Rules
Employee contributions, known as elective deferrals, are a funding source for a SIMPLE IRA. For 2025, the standard amount an employee can defer is $16,500. This limit increases to $17,600 for employers with 25 or fewer employees. Employers with 26 to 100 employees can offer this higher limit if they commit to a higher employer contribution rate.
Employees aged 50 and over can make additional “catch-up” contributions. For 2025, the standard catch-up is $3,500. A higher catch-up of $5,250 is available for employees aged 60 through 63. For employees at businesses offering the increased deferral limits, the catch-up contribution is $3,850.
Employee contributions are made on a pre-tax basis, reducing taxable income. However, employers now have the option to allow contributions from both the employee and employer to be made on a post-tax (Roth) basis.
Employers are required to make contributions, selecting one of two methods each year. The first option is a dollar-for-dollar match of the employee’s contributions, up to 3% of their compensation. To offer the higher employee deferral limit, employers with 26 to 100 employees must increase this match to 4%.
The second option is a non-elective contribution, where the employer contributes 2% of each eligible employee’s compensation, regardless of whether the employee makes their own deferrals. This 2% contribution is based on compensation up to a limit of $350,000 for 2025. If an employer with 26 to 100 employees chooses this method and wants to offer the higher deferral limit, the non-elective contribution must be increased to 3%.
Withdrawals from a SIMPLE IRA made within the first two years of an employee’s participation in the plan are subject to a 25% penalty. This is higher than the standard 10% penalty for early withdrawals from most retirement plans before age 59½.
Eligibility for Employers and Employees
A business is eligible to establish a SIMPLE IRA if it meets two conditions. The company must have 100 or fewer employees who earned at least $5,000 in compensation during the preceding calendar year. The employer also cannot currently maintain any other form of retirement plan, such as a 401(k) or a SEP IRA.
An employee is eligible to participate if they have received at least $5,000 in compensation from the employer during any two previous years and are reasonably expected to earn at least $5,000 in the current year. All contributions made to a SIMPLE IRA, both from the employee and the employer, are immediately 100% vested. This means the employee has full ownership of all funds in their account from the outset.
Information and Decisions for Plan Setup
An employer must select a financial institution, such as a bank or investment firm, to act as the trustee for the plan. This institution will hold and manage the individual IRA accounts for all participating employees. The choice of institution can impact investment options and potential administrative fees.
The employer must also formally decide on the contribution structure it will use. This decision is not permanent and can be changed annually, but it must be established before the plan’s effective date and communicated clearly to all employees.
The IRS provides standardized forms to establish a SIMPLE IRA plan. If the employer designates a single financial institution for all employee accounts, it will use Form 5305-SIMPLE. If employees are permitted to choose their own financial institution to hold their SIMPLE IRA, the employer must use Form 5304-SIMPLE.
A part of the setup process is providing a formal notification to all eligible employees. This notice must describe the plan’s features, explain the employer’s contribution choice, and detail the 60-day election period during which employees can decide whether to participate and how much to defer. This notification must be distributed before the plan’s start date.
Administering the Plan
The employer is responsible for withholding employee elective deferrals from their paychecks and depositing them into their respective SIMPLE IRA accounts. These deposits must be made as soon as possible, but no later than 30 days after the end of the month in which the money was withheld.
Employer contributions, whether they are the matching or non-elective type, operate on a different timeline. These contributions must be made by the employer’s federal income tax filing deadline for that year, including any extensions.
An annual administrative task is providing the required notice to employees before the start of the new plan year. This notice must be given before the annual 60-day election period, which typically runs from November 2 to December 31. The notice reminds employees of their opportunity to start, stop, or change their salary deferral amounts for the upcoming year and informs them of the employer’s contribution method for that year.